What are ERC-20 Tokens and why do they matter?
Ethereum was launched on July 30, 2015 out of a shared living space in Zug, Switzerland. Vitalik Buterin and his team of cypherpunks in Zug and around the world envisioned a decentralized world computer inspired by Bitcoin. From that point on, developers interested in expanding blockchain ecosystems flocked to Ethereum, shaping what decentralized finance (DeFi) is today.
One of the most significant innovations to Ethereum is Fabian Vogelsteller’s ERC-20 token standard, which has since become the most widely used token standard on the Ethereum network. It has also inspired similar standards on other blockchains, including Solana, Binance Smart Chain and Tron among others.
Understanding ERC-20 tokens is a critical step for anyone who is looking to develop their understanding about securing and managing digital assets on Ethereum.
What is an ERC-20 Token?
ERC-20 is a token standard on the Ethereum network. ERC stands for Ethereum Request for Comment.
ERC-20 tokens are fungible, meaning that each token of a given type is identical and interchangeable with another token of the same type. In contrast, NFTs (Non-Fungible Tokens) are not fungible; each NFT is unique and has distinct properties that set it apart from others.
USDT, a stablecoin pegged to the US Dollar is a good example of fungibility in practice. Each USDT token is worth approximately 1 USD and is identical in value to every other USDT token in circulation.
Note: Even if USDT suffers a crisis and becomes less valuable than the US Dollar, 1 USDT will always equal 1 USDT.
Transactions on the Ethereum blockchain involving assets other than ETH or NFTs are most likely ERC-20 token transfers.
The History and Purpose of ERC-20 Tokens
ERC-20 tokens are fundamental to DeFi on Ethereum. They allow developers to build projects on the network and rose in popularity as the first token standard, especially during the 2017 bull run, when the Ethereum network saw a surge in project launches known as the “ICO craze.”
ICO, or Initial Coin Offering, is comparable to an IPO (Initial Public Offering) in the stock market. During the 2017 ICO craze, developers offered ERC-20 tokens as stakes in their projects, with buyers purchasing these tokens in hopes they would appreciate in value as projects gained traction.
Since then, ERC-20 tokens have evolved beyond ICOs, allowing holders to engage in unique ways with Ethereum-based projects, like staking coins to earn returns and using tokens to proportionately vote in Decentralized Autonomous Organizations (DAOs) like Uniswap.
How ERC-20 Tokens Work in the Ethereum Ecosystem
ERC-20 tokens are fundamental to Ethereum’s decentralized ecosystem because they enable developers to build decentralized applications (dApps) and smart contracts that interact with each other. This allows for a wide range of use cases.
Interoperability through the ERC-20 token standard ensures that tokens, dApps, and wallets can communicate and work together.
The ERC-20 standard includes essential functions which include:
- transfer: Allows users to send tokens from one address to another.
- approve: Enables token holders to grant permission to other addresses to spend a specific number of tokens on their behalf.
- balanceOf: Provides the token balance of a given address, enabling applications to check account holdings.
Security & Privacy Implications of using ERC-20 Tokens
Ethereum is a public blockchain. This means that anyone who makes a transaction that gets confirmed will broadcast that transaction to the world, and the details of that transaction will forever be on the blockchain. These details include:
- Sending address
- Receiving address
- Amount of asset sent
- Amount of ETH paid for the transaction (Gas fee)
Be aware that if your address is publicly tied to you in some way, every transaction you make will be very easily tied back to you as well. Understanding this concept will help you proactively manage your on-chain footprint, and might prevent you from having security issues in the future.
Always keep your wallet backup secure and avoid linking your personal identity to your Ethereum address whenever possible.
ERC-20 vs. Other Token Standards: Why ERC-20 is Dominant
The ERC-20 token standard is the most widely used standard for fungible tokens on the Ethereum blockchain due to its simplicity, interoperability, and early adoption in the decentralized ecosystem.
NFTs (Non-Fungible Tokens) cannot be ERC-20 tokens, and typically follow ERC-721 or ERC-1155 standards.
ERC-20 Tokens and Wallets: How to Store Safely
ERC-20 tokens are a blockchain asset which exist on the Ethereum network. This means that any Ethereum wallet is able to send and receive ERC-20 token transactions. You can store ERC-20 wallets on a cold storage Hardware wallet like a Trezor, on a hot/software wallet on your phone or computer, or on an exchange.
Hardware wallets like Trezor are ideal for ERC-20 tokens because they store the private key to the funds off your computer, making it impossible to hack your wallet without physical access to your Trezor device and its PIN, or your wallet backup.
Using a Trezor provides critical security advantages for ERC-20 token holders. By storing private keys offline, Trezor devices significantly reduce the risk of hacks or unauthorized access. Trezor’s address and transaction verification process allows you to confirm each transaction directly on your device, preventing address poisoning attacks or malware from altering your transaction details.
For more information on storing your ERC-20 tokens using Trezor Suite, please see this article.
ERC-20 Tokens in Trezor Suite
Real-World Applications and Use Cases of ERC-20 Tokens
ERC-20 tokens serve various purposes within the Ethereum ecosystem:
- Decentralized Finance (DeFi): Many DeFi protocols use ERC-20 tokens to power their platforms. These tokens enable lending, borrowing, staking and other operations which allow users to earn returns on their assets.
- Stablecoins: A stablecoin is designed to hold the value of the underlying asset, in most cases, the US dollar. Tokens like USDT and USDC provide price stability on the blockchain, allowing users to transact and store value without exposure to cryptocurrency price volatility.
- Governance: Projects like Uniswap (UNI) use ERC-20 tokens for governance, enabling token holders to participate in decision-making processes, such as protocol upgrades and policy changes.
The ERC-20 standard has been fundamental to Ethereum’s growth by lowering entry barriers for new projects and fostering an open, interconnected ecosystem.
Risks and threats involving ERC-20 Tokens
Scammers may try to trick you into entering your wallet backup on a website or app through phishing scams that create a false sense of urgency. Common situations scammers invent include urgent firmware updates, threats of frozen funds, or a wallet being hacked.
Your wallet backup is the key to your funds and should never be entered on any device besides your hardware wallet.
If you receive any message or alert asking you to enter your wallet backup into a computer, assume it is a scam and do not engage with it.
Holding ERC-20 tokens does not come without risk. Just like any Cryptocurrency, if the tokens are sent to a wrong address or if your private key is compromised, your assets are at risk.
Because anyone can create an ERC-20 token and deploy a smart contract, scams and fraudulent tokens are common risks within the Ethereum ecosystem, especially when engaging in DeFi. While decentralized protocols encourage innovation and collaboration, they also attract bad actors who may attempt to exploit others in the network.
Always exercise extreme caution when interacting with unknown smart contracts, especially those promoted on social media.
When sending funds to an address or to your wallet, always verify the address is correct on your Trezor device. In the unlikely scenario your computer has some form of malware, this will protect you from sending your tokens to a scammer’s address. If your computer displays a different address from your Trezor device when either sending or receiving assets, do not complete the transaction and contact Trezor support immediately.
Beyond malicious smart contracts, two most common types of on-chain scams are discussed in the articles below. Please read both articles carefully so you don’t accidentally fall victim to one of these scams:
Gas fees: Sending ERC-20 tokens to another wallet
Sending an ERC-20 transaction always requires a gas fee (transaction fee on the Ethereum network). Gas fees are dynamically priced based on network congestion. During busy periods, gas fees can exceed even $100 USD, while in slower times, they may be just a few cents. This is because
Gas fees are paid in ETH, meaning you need ETH in your wallet to send an ERC-20 transaction. You can receive ERC-20 tokens in a wallet without ETH; however, to send those tokens, you’ll need to first add enough ETH to cover the gas fee.
How to Trade and Swap ERC-20 Tokens Securely Using Trezor Suite
All Ethereum ERC-20 tokens are supported by Trezor Suite. To add them, simply create an Ethereum account and click 'Add token' to add a new token using its contract address.
If you want to swap your ERC-20 token for another ERC-20 token or for Ethereum, it’s very easy to do it right from the convenience of Trezor Suite.
Trezor’s Smart Trading Engine optimizes trades across multiple exchanges, finding you the best rate for your toke swap. Another benefit of trading your assets directly in Trezor Suite is that everything happens on chain, and you never need to relinquish control of your private keys, unlike with centralized exchanges.
For more information on swapping directly within Trezor Suite, please read this article.
Frequently Asked Questions About ERC-20 Tokens
What is the difference between ETH and ERC-20 tokens?
Ethereum (ETH) is the native cryptocurrency of the Ethereum network. It is essential to the Ethereum blockchain, facilitating transactions and securing the network through its Proof of Stake consensus mechanism. It powers the network through staking and gas fees (transaction fees) required for transactions, including swaps between ETH and ERC-20 tokens, swaps between ERC-20 tokens themselves, and creation of smart contracts.
ERC-20 tokens, by contrast, are assets created through smart contracts on the Ethereum network. While they operate on Ethereum, they are separate from ETH itself. ERC-20 tokens can represent a variety of assets, such as stablecoins like USDT or governance tokens used in decentralized applications (dApps). Unlike ERC-20 tokens, which can be created freely with a chosen supply, ETH has a controlled issuance process and cannot be arbitrarily created like an ERC-20 token contract.
What is a smart contract?
A smart contract is a self-executing contract that exists on a blockchain. For ERC-20 tokens, a smart contract must be created to define the token’s rules and manage its supply. Smart contracts can also support various DeFi activities, like staking and lending, by automating these processes securely on the blockchain.
How do I get my ERC-20 wallet address?
Your ERC-20 wallet address is the exact same address as your Ethereum address. You don’t need to change anything if you want to receive some ERC-20 tokens - simply send them to your Ethereum address! If you want to test it out for yourself at first to be safe, send a small test transaction and make sure it goes through.
Can I send an ERC-20 token to an ETH address?
Yes! An Ethereum (ETH) address can receive and hold ERC-20 tokens. When you send an ERC-20 token to an ETH address, that address will have control over the tokens.
Do I need ETH to send an ERC-20 token to another address?
Yes, you will need ETH to pay the gas fee, which is the transaction fee on the Ethereum Network. Gas fees vary dynamically based on the network congestion, so always make sure to plan accordingly if you need to send ERC-20 tokens to another address.
How many ERC-20 tokens are there?
At the time of writing, there are are currently over 1.4 million ERC-20 token contracts, most without market value. View the full list.
How do I get ERC-20 tokens?
You can purchase ERC-20 tokens on a crypto exchange, or if you have ETH on your wallet, you can swap it for ERC-20 tokens on an exchange. Trezor Suite offers an inbuilt feature which allows you to swap ETH for ERC-20 tokens and vice versa. Just remember - if you want to use those tokens in the future and send them somewhere, you will need some ETH on the same address to pay for the gas fees!
My ERC-20 tokens aren’t showing up. What’s happening?
Given the amount of fake/scam ERC-20 tokens, many wallets (including Trezor Suite) have opted to hide unknown ERC-20 tokens. If you are using Trezor Suite, you’ll need to navigate to the “hidden” tokens section to check and see if your ERC-20 tokens have been placed there.
The Future of ERC-20 Tokens and Beyond
As the Ethereum ecosystem evolves, new token standards are emerging that may enhance or even replace some functionalities of ERC-20. Standards such as ERC-777 and ERC-1155 are expanding token capabilities, adding features like more efficient batch transfers and advanced security features. These advancements could impact the future of ERC-20 by providing alternative solutions that address some of its limitations.
Additionally, Ethereum’s shift to Ethereum 2.0 and the adoption of Layer 2 scaling solutions are expected to bring significant changes to ERC-20 token usage and security. Ethereum 2.0’s transition to proof-of-stake (PoS) and Layer 2 solutions like Optimism and Arbitrum aim to reduce transaction costs and increase processing speed. This shift will likely make ERC-20 tokens more accessible for everyday transactions while enhancing overall network security and reducing Gas fees.
ERC-20 will likely remain foundational for the foreseeable future, as its broad adoption and interoperability continue to support a vast range of decentralized applications and DeFi protocols.
Conclusion
ERC-20 tokens play an important role in the Ethereum ecosystem by enabling development of decentralized applications and DeFi protocols. Their simplicity, interoperability, and broad adoption make them essential for the Ethereum network.
Protecting ERC-20 tokens with a hardware wallet like Trezor is crucial for long term safety of your assets. Trezor not only stores private keys offline but also provides an added layer of verification by allowing you to check sending and receiving addresses on your Trezor device, helping you avoid malware, phishing and address manipulation attacks.
For those looking to securely manage their ERC-20 tokens and benefit from seamless functionality, Trezor Suite offers a secure, user-friendly solution. With built-in tools for sending, receiving, and even swapping ERC-20 tokens, Trezor Suite simplifies the management of your digital assets while ensuring robust security.
Ready to take control of your ERC-20 tokens? Explore Trezor Suite to get started.